Tax Law - cases

EXERCISES

CASE STUDY

1. Country X decided to introduce a domestic rule that limits the deduction of interest

for business activities up to 30% of the total amount of interest paid either

domestically or internationally by a business.

Do you think that the new domestic rule in Country X might conflict

 with any of the principles of taxation already studied?

The principle in contrast with this rule is the Ability-to-pay. That is you shouldn’t

pay more than you have. Recognized in many countries at constitutional level. This

case is happening now in Germany. Also tax neutrality is affected.

Do you think that it would make a difference either wheter those

 principles are expressly recognizes within domestic law, supranational

law (EU law) or international law?

It could make a difference if it is at national level, people or corporation will just

go somewhere else where it’s cheaper, while if it is at European or international

level, corporations must accept it because it’s the same everywhere. International

law is a tax treaty between two countries, while at level of EU tax law, you have to

implement it, all over the others EU states.

2. Country X has a corporate income tax with a tax rate of 25% since 1999. In 2018,

the tax administration issues a notice that provides that in case of tax evasion this

rate will be increased up to 80% as a penalty.

Do you see any problem with this new administrative notice?

 It goes in contrast with the rule of law. There is a simple notice that says that

the rate will increase. When you set up a tax rate, there is a limit based on logic. 80%

will be confiscatory.

What principles of taxation may be jeopardized in this case?

 Principle of Legality, principle of neutrality even though is not written and the

ability to pay.

3.Dr. Tortellini is a re-know tax expected who affirms in his last paper that a VAT rate

of 10% has indeed a regressive effect.

Do you agree with his statement?

 I think that has a regressive effect because it decreases as you earn more

money. Tax is decreasing according to decrease of the income.

Why? Why not?

 Two families consuming food, if one family has double of the other, but they will

consume the same, the poorer family will spend much more in proportion with

the income

At the same time a richer family will consume some other goods that the poorer

family wont spend. The consumption is not correlated with the increase of income;

VAT is regressive.

4. Dr. Tortellini is now advising Country X to implement a tax performs. He proposes to

introduce a “progressive” CIT, i.e. a CIT with progressive tax rate sas per the size of

the firms and the income they produce. The above, according to Dr. Tortellini will

increase fairer taxes, because larger size firm will pay more taxes than smaller ones.

Does Dr. Tortellini’s advice make sense?

 When we have a corporate income tax, taxes are paid through investors,

customers etc. So this assumption does not make sense.

Why? Why not?

 When you have a personal income tax, is supported by an individual. In a

corporation we have many papers, and they are passing through customers,

employees, investors.

CASE STUDY

1. After 20 years living and working in Country X, Mr. Robinson and his family decides

to move to Country Y. Mr. Robison registers his children at a school in Country Y and

his wife gets a job as a school teacher there too. For practical reasons, Mr. Robinson

keeps his bank account in Country X and decides to lease the family house in that

country. The payments of rent are deposited directly in the bank account of Mr.

Robinson in Country X. In country Y, Mr. Robinson works as self-employees, but the

majority of his clients are located in Country X.

 What problems do you see with regard to Mr. Robinson’s movement to

Country Y? Two issues in this case: residence and domicile, so first of all you

have to explain the characteristics of them. In country X: he owns a house and

he is renting that house, clients (he still working in country X). The problems:

Country X applies the residency, but he is moving right now, so he lost that

residence, even though he has a house in there or clients. It depends if Country

X applies also domicile. So the issues are banks, clients etc. to answer to this

question, you have to start from the basis: domicile and residence, and then

analyzed the taxation.

In a position as tax advisor, would you recommended him to do

 something different? I would recommend to close the bank account and to

eliminate connections with that country as well as possible.

2. Mr. Fletcher wants to invest in a touristic business resort in “Mojito Country” and for

that purpose he needs a legal form. The State offers the possibility to set up both

corporate and non-corporate entities, including also sole proprietorship entities. The

statutory CIT rate in Mojity country is of 10% and a complete exemption of taxes is

applied for individuals no matter where the income is sourced.

 Should Mr. Fletcher set up a Corporate or Non-corporate legal entity to

carry out his business? Does it make any difference?

I prefer to carry out a Non-corporation because it is not liable for taxes as an

1

entity itself, instead of paying a CIT of 10%., and also because individuals are

exempted of taxes.

 What are the advantages of both options?

Corporate: Non-Corporate

Solid legal structure, giving capital, giving assets.

entity: from a legal prespective, is very easy to manage for accounting purposes

and not many legal expenses.

 Would you answer vary if i would say that the effective CIT rate in

Mojito country is an average of 0,001%? Yes, I will, because the rate is

really lower that 10%. The difference is so minimum that he will consider to

build a corporation.

CASE STUDY

1 Corporare income taxes

3. A group of investors decides to invest in the mining sector of country X. For this

purpose, they decide to set up a Partnership, considering the legal simplicity of its

formation in comparison to a Corporation. A Partnership in country X is not subject to

taxation at all. Taxes are rather charged at the level of the partners (i.e. personal

income tax) but only affecting domestic sourced income received. The Partnership

receives income from its operational activities of 100,000 EUR. It also receives interest

from investments in country Y, which amount to 50,000 EUR and it pays 5,000 EUR on

taxes in country Y derived from this investment income.

How much taxes must be supported in country X? Who does it pay

• those taxes? They are paying 100.000 at the level of personal income in

country X. Partners pay.

May the investors deduct the payment of foreign taxes (country Y) in

• country X? Why? Why not? Residents are only taxing on domestic source

income, everything is from abroad, is not flowing to the partners so they are not

deductible.

Would it make a difference if Country X allows the taxpayer to change

• the tax treatment of a Partnership? Do you know an example from real

life? A partnership is not taxed, or what we tax are the partners. This is a case

of US, chucky box, some entities can choose what tax treatment. So Partnership

is treated as a corporation, and taxed as a corporation.

I will include domestic source income and foreign source income… a worldwide

taxation.

Now the entity will be taxed and not the partners. (Maybe you are expecting

losses for the next five years and you want to use those losses).

(The owners of the partnership have to pay taxes as a corporation.)

CASE STUDY

4. Mr. Fletcher is an Italian resident who has the following items of income:

Wages = 100

Dividends from Bahamas = 50

Interest from financial instruments in London = 50

Scholarship in Italy = 35

The laws in country X allows for a exemption of 50% of foreign wages under certain

circumstances. Mr. Fletcher can deduct a lump sum of 100 every year when he

prepares his tax return.

What is the gross income of Mr. Fletcher? Scholarship in Italy is not

• considered as income at all. So the right is 200€.

What is the taxable income of Mr. Fletcher? Mr. F. has a standard

• deduction, so if he has a gross income: 200-100=100, taxable income is gross

income-deductions

If 50 out of 100 are indeed foreign wages. How much vary his gross

• income? How much vary his taxable income? 50% of 50 25. In this

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question we assume that a foreign wage is the half of 100.

Would your answer change if Mr. Fletcher is considered a non-resident

• in Italy? It changes only because dividends are not considered.

CASE STUDY 1

TIAF Co. is a company incorporated in Country X, which sells cars. On 31 December

2017, the company showed the following economic results derived from its activities:

Total annual sales 2,000,000 EUR

Interest income 100,000 EUR

Cost of goods sales 100,000 EUR

Operational expenses 400,000 EUR

Non-oper. Expenses 100,000 EUR

CIT rate 35%

1) What is the taxable income of TIAF Co. for purposes of the CIT in

Country X? Explain the results. (2000000+100000-100000-400000-

100000)= 1.500.000.

(Because we have to sum total revenue and interest income, and subtract all

the other datas.)

2) What is the amount of CIT to be paid in 2017?

CIT= 1.500.000x 35%= 525000.

3) What is the “effective tax rate” paid by TIAF Co.?

The simplest way to calculate is the amount of taxes divided by total amount of

revenue.

525000/2.100.000=0,25 25%.

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4) Would your result change if TIAF Co. would have a NOL of 1,500,000 in

2018 to carry back to 2017? How?

If changes. Taxable income= 0 no taxes to be paid.

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CASE STUDY 2

A company has 1,000,000 EUR losses in 2017. The company has the chance of either

using those losses up to one year back or up to three years in the future. In 2016 the

net profits after taxes of 500,000 EUR. total revenues

company registered The of the

2016 were 2,000,000 EUR totals expenses/costs were 1,000,000

company in and the

EUR. The same expenses/costs are expected for 2018, although the revenues

estimated are 3,000,000 EUR.

1) How much CIT did the company paid in 2016? (Without considering the

use of NOLs). What is the effective CIT rate in 2016?

Total revenue 2.000.000

Total expenses (1.000.000)

= Taxable income 1.000.000



CIT 50% 500.000

NET profit 500.000

2) How much CIT is the company expected to pay in 2018 (without

considering the use of NOLs)? Please assume that effective tax rate

equals the statutory tax rate.

Total revenue 3.000.000

Total expense (1.000.000)

= Taxable income 2.000.000

50% CIT= 1.000.000

3) Would you recommend “carrying back” or “carrying forward” the

amount of NOLs of 2017? Why?

It would be a long process to carry back even if you don’t pay taxes; you need a

refund, which takes long time. Carry back